Is A Depository Institution Your Solution To Safer Savings?

Student Editor: Dillon H.

A depository institution is a type of financial group that loans money to borrowers in exchange for interest payments. Depository institutions are so called because the money they loan out comes primarily from the savings that the institutions’ clients lend to them. The main kinds of depository institutions are commercial deposit banks and credit unions. Major reasons why people deposit their money in depository institutions include the security and protection they provide from theft & loss. These banks and credit unions also provide their clients with the convenience of accounts through which to pay their bills and manage their money (for example ATM’s and electronic payments). Finally, the depository scheme also allows savers to become lenders and thus earn interest payments for their risk. 

When you deposit (store) money in a depository institution, the institution is allowed to loan out up to 90% of the principle you have stored with them. In exchange for the use of your deposits and for the risk associated with lending them out, these banks pay you—the depositor—interest. All depository banks in the United States are backed by the FDIC, Federal Deposit Insurance Corporation. The FDIC’s main role is to increase public confidence and participation in the financial system by guaranteeing the deposits of savers to the tune of 250 thousand dollars per depositor per account. Meaning that if you jointly own a savings account with another person, you are each protected for up to a quarter million dollars in losses if the bank goes out of business. So if you have less than 250 thousand dollars in your account, you will be completely paid back by the FDIC if anything goes wrong. The FDIC is funded by insurance-premium contributions from the banks and by a hefty line of credit from the United States Treasury. 

Another kind of a depository institution is a credit union. Like a commercial bank, a credit union takes deposits from member clients for safekeeping and convenience and in turn makes loans with the hope of making profits through interest payments. Unlike the bank, however, the credit unions are member-owned and are typically non-profit companies, meaning that they have something other than profits as their basic motivating factor. Credit unions are primarily concerned with improving the access to credit, goods and services for the population (typically local) they serve. Credit unions only lend money to members (co-owners) of the union. To become an owner, all you have to do is deposit funds into the institution. After becoming an owner, you have the right to a share in the profits of the bank as well as involvement in the governance of the institution. Because the credit-unions are client-owned, interest rates are typically lower than your average commercial bank because they do not need to pay dividends (earnings on shares of the company) to millions of stockholders. 

It is not all smooth sailing, however. If there should be some sort of financial catastrophe, credit unions are usually less equipped to seek additional funds and maybe forced to close their doors. Credit Unions also have insurance protections similar to those of the banks. They are backed by an organization called the National Credit Union Administration (NCUA) that offers many of the same client protections as the FDIC does for the major banks. So although credit unions have important differences from the commercial banks, because they also have the backing of the United States Government and financial system, they are considered by and large to be safe and reliable places to deposit wealth.

FDIC & Credit Union logos